Weekly economic review (Dec.10-14)

Analysis Materials 18 December 2012 11:48 (UTC +04:00)

Standard & Poor's Ratings Services today affirmed its 'BBB-/A-3' long- and short-term foreign and local currency sovereign credit ratings on the Republic of Azerbaijan. The outlook is stable. The transfer and convertibility assessment remains at 'BBB-'.

"The affirmation reflects our view of Azerbaijan's stable public sector net asset and strengthening external creditor positions, which have helped maintain substantial fiscal and external buffers. In this regard, we also consider general government debt as limited despite an upcoming budget deficit", report says.

Due to lower oil production in 2012, and despite higher public spending, S&P believes real GDP growth will likely only reach 1.8% in 2012 and 3.4% in 2013, equivalent to 0.7% and 2.3% GDP per capita growth.

We expect oil production to remain largely stable through 2017. This should ensure continued current account surpluses at close to 20% of GDP in 2013-2015 at an expected average oil price of $112 per barrel", report says.

Given estimated gross external financing needs at 55% of current account receipts (CARs) plus usable reserves, as well as narrow net external assets of 92% of CARs, Azerbaijan is in a strong external position, S&P notes.

"In line with external surpluses, Azerbaijan's fiscal balances should remain positive in the medium term, though we forecast a consolidated general government deficit of 2.6% of GDP, the first in a decade. "Increased government stimulus spending, particularly in capital investment, has driven this", says report.

According to S&P experts, capital expenditures equal a high 46% of total expenditures in 2013 provide ample fiscal flexibility if oil prices decline. "We expect the State Oil Fund (SOFAZ), a fiscal reserve fund invested externally, will exceed $33.5 billion in December 2012 (49% of GDP), up from $29 billion at end-2011. Even if SOFAZ does not add further savings in 2013, or sees a decline, its assets provide the state with a considerable cushion against an oil price decline", document says.

S&P notes that a 4.2% of GDP in 2012, the gross central government debt burden (excluding guarantees) is very small. According to experts, Azerbaijan's monetary and banking systems are underdeveloped, with weak governance and underwriting standards, which are a restraining influences on the country's ratings.

"However, dollarization levels have declined markedly, now only representing 44% of all deposits and 32% of all loans. Furthermore, monetary policy lacks efficient instruments to neutralize large-scale capital inflows effectively and we view coordination with fiscal policy as insufficient", - report says.

The stable outlook balances expectation of a further strengthening of Azerbaijan's external balances and a stable trajectory of its fiscal balance sheet, against moderate growth prospects and an unreformed institutional framework.

S&P could consider raising the ratings if Azerbaijan's net external asset growth were supported by a significant improvement in the macroeconomic environment, an acceleration of structural reform and diversification, as well as a strengthening of monetary policy and the banking system.